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I have dual U.S./Australian citizenship and reside permanently in U.S. I am expecting an inheritance from a relative's estate in Australia. If I open an account with an Australian bank and invest in an Australian term deposit, will I have to pay both Australian and U.S. tax on the interest income? And will I have to file an Australian tax return?

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As a US citizen I've had an Australian bank account when I was not living in Australia, and paid non-resident withholding taxes on it to Australia. Because tax was withheld at the source in Australia, at that time no Australian return was necessary.

The United States practices worldwide taxation of income of its citizens, with tax credits for taxes required to be paid to foreign countries and a large deduction for earned income earned when you live outside the USA.

Example: You earned $500AU gross interest, and paid $50AU tax in Australia directly deducted by the bank. The exchange rate is 0.80. On your US return you put US$400 in interest on schedule B, and on the foreign tax credit form your foreign tax on this interest was US$40.

You might want to take a look at Form TD F 90-22.1. This is a yearly required report on foreign bank accounts for anyone who has over $10,000 in a foreign bank. There are some very large potential fines for failing to file this foreign bank account report.

Hope this is helpful...

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